Buck v. Northern Dairy Co.

• Decision Date: 22 September 1961
• Docket Number: No. 90,90
• Citation: 110 N.W.2d 756,364 Mich. 45
• Parties: Samuel H. BUCK, Plaintiff and Appellee, v. NORTHERN DAIRY COMPANY, Defendant and Appellant.
• Court: Michigan Supreme Court

Page 756

110 N.W.2d 756

364 Mich. 45

Samuel H. BUCK, Plaintiff and Appellee, v. NORTHERN DAIRY COMPANY, Defendant and Appellant.

No. 90.

Supreme Court of Michigan.

Sept. 22, 1961.

Baldwin & Kendricks, Marquette, for defendant-appellant.

Waldo A. McCrea, Marquette, for plaintiff-appellee.

Before the Entire Bench.

SOURIS, Justice (for reversal).

Dr. Samuel H. Buck, plaintiff, was president and a director of Northern Dairy Company, defendant and appellant. He owned 540 of the 1,750 shares of defendant's outstanding capital stock. The balance of the stock was owned by 62 other stockholders, a large proportion of whom owned less than 20 shares each and, as a consequence, Dr. Buck's ownership of the block of 31% of the stock resulted in his having working control of defendant corporation. In August of 1956, simultaneous with the sale of his controlling block of stock to a fellow director, Dr. Buck entered into a 'retirement annuity agreement' with defendant corporation whereby defendant agreed to pay an 'annuity or pension' of $150 per month to Dr. Buck for life and, if he should die within 6 years, to his estate until the expiration of 6 years from the date of the agreement so that a minimum of $10,800 would be paid. Upon execution of the agreement and sale of his stock, Dr. Buck resigned as president and director of defendant, and payments were thereafter made to him by defendant for a period of 26 months for a total of $3,900.

In the meantime, in June of 1958, the Soo Creamery of Sault Ste. Marie purchased the block of stock formerly owned by plaintiff from the director to whom he had sold it and acquired sufficient other shares to give it absolute control of defendant. 'Annuity' payments to Dr. Buck were continued for several months after the Soo Creamery acquired control of defendant and then were stopped. Dr. Buck instituted this bill in equity for specific performance of the agreement, and defendant filed its crossbill seeking the return to it of the $3,900 already paid to plaintiff under the agreement. Defendant claimed, based upon pleadings in its answer and in its cross-bill of complaint, that the agreement was void because, plaintiff being then a director of defendant, the agreement was not authorized by a disinterested quorum of defendant's board of directors and because the payments required to be made thereunder were in fact a part of the purchase price for plaintiff's block of control stock for the benefit of plaintiff and the purchasing director at the expense, and to the detriment, of defendant corporation and its remaining stockholders. Plaintiff countered by claiming that the majority of the board of directors voting in favor of the retirement annuity agreement was disinterested and that the agreement was a fair one to the defendant corporation. The chancellor denied defendant the relief sought in its cross-bill and ordered specific performance of the agreement.

Relying upon Veeser v. Robinson Hotel Co., 275 Mich. 133, 266 N.W. 54, 55, defendant takes the position that the agreement is void, not merely voidable, because not authorized by a disinterested quorum of its board of directors and that this result would follow even if the agreement were otherwise fair to the corporation. Such, indeed, was the holding in Veeser v. Robinson Hotel Co., where this Court said:

'The rule which permits a director of a corporation to deal with it, even in good faith, is limited to those cases where the corporation is represented by a quorum of disinterested directors or other independent officers or agents authorized to contract for it.'

The Court had before it, in the Veeser case, § 13(5) of P.A.1931, No. 327 (C.L.S.1956, § 450.13(5) [Stat.Ann.1959 Cum.Supp. § 21.13(5)]), ¹ and it was the rule set forth in that statutory provision which this court so limited. If the language of the Veeser opinion were literally applied as defendant urges upon us, the familiar family owned corporation (the stock of which frequently is owned by husband and wife, both serving on the board of directors, with their attorney as the third director, and the husband serving also a president and operating manager) legally would be unable to authorize and pay compensation for its president's services no matter how fair the amount might be. It goes without saying, therefore, that no member of the family controlling the corporation legally could risk dealing with it in other matters, such as by selling or leasing real or personal property to or from it regardless of the advantages which might inure to the corporation's benefit therefrom. From the typical family owned corporation, we move to the corporation all of the stock of which is held by several otherwise unrelated owners and thence to the corporation a majority of the stock of which, or a controlling block of the stock of which, is owned by one person and the balance spread out in the hands of a few or many. It is this latter situation with which we are confronted in the case at bar.

We can see no reason for so limiting the operations of such corporations when the statutory rule of fairness properly can be read to protect the corporation, its minority stockholders and its creditors. ² Whether or not a disinterested quorum of directors approves a transaction between the corporation and a director or a partnership, association or other corporation having common members or directors, the statute imposes the burden of proving fairness to the corporation upon the other party to the transaction whenever its validity is questioned. Indeed, we have not followed the literal language of Veeser. Prior decisions of this Court have considered the fairness of contracts authorized for corporations by boards of directors not disinterested therein. See Wiseman v. United Dairies, Inc., 324 Mich. 473, 492, 493, 37 N.W.2d 174. Such cases have substantially reduced the vitality of the opinion in Veeser v. Robinson Hotel Co. See also Pergament v. Frazer, D.C., 93 F.Supp. 13, 23, affirmed sub nom. Masterson v. Pergament, 6 Cir., 203 F.2d 315. To the extent Veeser has not been overruled already, we do so now. ³

Defendant corporations's claim that the agreement was invalid did not rest alone upon the claimed absence of a disinterested quorum of directors. Defendant also claimed in the trial court and before us that the agreement for the payment to plaintiff or his estate of an annuity for life or for a minimum of 6 years was unfair to the corporation because (1) there was no consideration flowing to the corporation therefor, for, and (2) the agreement constituted part payment to plaintiff for his block of control stock and should not have been made from corporation assets. We think the record supports both grounds for defendant's claim of unfairness.

In 1939 an agreement was executed between the parties hereto whereby defendant agreed to pay plaintiff $187.50 per month, which payment was described as a salary for advisory and consulting services, but which payment was to be reduced by the amount of dividends paid plaintiff on the 450 shares of defendant's capital stock then owned by him. Significantly, the agreement was to terminate upon transfer by plaintiff of all of said stock, and it provided that his 'salary' was to be reduced 42cents per month for each share of stock, less than all, so transferred. Other provisions of that agreement are not material to the problem being considered. In any event, in 1943 an amendment was made in which the 1939 agreement was described accurately as assuring plaintiff at least $5 per share per year on the defendant's capital stock owned by him. The 1943 amendment relieved plaintiff from any obligation to act as a special consultant under the earlier agreement and defendant company re-affirmed its 'obligation' to pay plaintiff in the following words:

'Said party of the first part hereby continues, however, to guarantee to the said party of the second part, an annual return of at least Five ($5.00) Dollars per share on all shares of stock held by him in said corporation.'

We reject plaintiff's suggestion that the 1956 'retirement annuity agreement' merely substituted an obligation on defendant's part to pay plaintiff $150 per month for life for a prior obligation to pay him $187.50 per month for life. As noted above, the parties themselves in 1943 described the 1939 'agreement' in words which really meant that plaintiff was guaranteed whether legally or not is unimportant to our decision) a $5 dividend on his common stock. Furthermore, by the express language of that agreement and of the 1943 amendment, any 'obligation' of defendant would terminate upon plaintiff's transfer of all of his stock. In other words, but for the 'retirement annuity agreement' executed in 1956, as soon as plaintiff sold his block of control stock defendant would have been free of all obligations to plaintiff. If there were any justification for that agreement from defendant's standpoint, it must be found other than in the prior agreements.

Plaintiff next contends that the 'retirement annuity agreement' was fair to defendant because defendant was thereby enabled to rid itself of him and thereby to effect changes in defendant's management policies. Having said this much, plaintiff has conceded that part of the purchase price for his block of control stock was the $150 per month payment from defendant corporation. The record indicates clearly that it was so regarded at the time of the transaction and yet, all of plaintiff's shares so purchased went to Harold C. Overholt, then also a member of defendant's board of directors who supplied the balance of the purchase price. None of plaintiff's stock was acquired as treasury shares or otherwise by defendant in exchange for the $150 per month agreement we are now told was part of the purchase price for the stock.

The record itself discloses the use of defendant's agreement by plaintiff and Mr. Overholt to effect their transfer...